Reshaping the future with

NFV and SDN

The impact of new technologies on carriers and their networks

May 2015

Content
1. The challenge and the vision

2. Rewriting the industrys future

3. Addressing critical challenges with NFV and SDN

4. Cloud networking: a double-edged sword

12

5 Creating value across the business

16

6. Choosing the right business model for each carrier

19

7. Driving the process of transformation

21

8. Conclusion

23

Preface
Network innovation, in the form of Network Functions Virtualization (NFV) and Software Defined
Networking (SDN), may seem to be history repeating itself. The cycle is familiar. A significant new
technology arrives on the scene and threatens to shake up the status quo. Sometimes the
technology is led by customer demand. At other times, it results from a supply-side push. From the
10,000-foot perspective, NFV and SDN may not look much different from any other supply-side
technology push. However, the scope and scale of transformational change that lies ahead cannot
be overstated. In our view, these technologies could be as significant as the introduction of IP
networks themselves.
The late 90s saw mass deployment of IP networking. At the time, large corporations were tired of
expensive switched-networking technologies and needed lower-cost, flexible networking solutions.
On the residential front, access to free Internet content became the new killer application. Driven
by customer demand, carriers overlaid IP networks on to legacy technologies such as ATM1. This
customer-driven network expansion has continued for nearly two decades, first overlaid and then
alongside legacy communications systems.
As a result, IP modernization in carrier networks has been restrained by the need to accommodate
legacy network functions and management systems. This has meant, the system gains possible
from full IP transformation and modernized operations have eluded most carriers. NFV and SDN,
however, could provide both the impetus and the opportunity to change. Carriers are now seeking
broad network automation and programmability transformation, by taking advantage of the same
technologies and platform designs that have revolutionized the management of applications, data
centers for over-the-top (OTT) and web-scale companies and cloud service providers.2
The dynamics of NFV and SDN adoption are quite different from those that drove mass adoption of
IP networking. The IP networking trend was initiated by a customer pull by enterprises wanting
more efficient IP-optimized services; for lower cost Internet access; more mainstream WAN
networking technology (similar to LAN), and the prospect of dynamic VPN creation and routing
leveraging IP/MPLS technology. However, there are two forces in this new technology cycle. On
one side, enterprises are adopting cloud architectures and IT technologies but these are working
over less flexible carrier IP/VPN connectivity services, so they are increasing their use of over-thetop Internet VPNs. On the other side, carriers are beginning to leverage cloud and IT technologies
to build the type of network service flexibility, dynamics and operational efficiency required to serve
their customers needs in the cloud age. So there is a push and a pull aspect to this new era,
which can be attributed to IP networking extension on one side and IT system extension on the
other to form a common IP-IT platform.
1 ATM refers to Asynchronous Transfer Mode technologies used for reliable circuit transport of communications signals.
2 Refers to companies that provide services delivered over public IP networks such as YouTube, Netflix, Whatspp, Viber and Line, as well as those providing cloud
infrastructure to others, such as AWS, Azure, Google Compute, Rackspace, Softlayer and so forth.

3

While the industry has yet to align behind a single vision of future networks, most see NFV and
SDN as central to the future. Therefore, industry R&D efforts are being driven by the promise of
lower operating expenses, along new value streams from new service portfolios for enterprises,
wholesale customers, and emerging web customers served from highly automated operations.
Every previous major technology cycle in the telecom industry has created winners and losers with
most ultimately driving higher demand and expanding revenues across the whole industry. Will this
hold true for NFV and SDN? In our view, there are many opportunities for the expansion of value in
the telecom sector, especially for carriers that purposefully embrace this transformation. But
carriers that fail to internalize these changes are likely to find themselves left behind with
uncompetitive and potentially untenable business and operating models.
In our view, there are many opportunities for the expansion of value in the telecom sector,
especially for carriers that purposefully embrace this transformation. But carriers that fail to
internalize these changes are likely to find themselves left behind with uncompetitive and
potentially untenable business and operating models.
This joint paper examines the economic impact of NFV and SDN on carriers. It aims at a rational
and informed analysis reflecting neither hype curve peak nor trough views and highlights
the strategic and business implications of the change. While the focus of the analysis is Europe,
many of the conclusions may also apply to carriers operating in competitive markets in North
America and Asia Pacific. The report is offered to a technical audience, business managers and
clued-in financial analysts and investors to facilitate debate about new strategic development paths
enabled by these technologies.
Arthur D. Little and Bell Labs have collaborated on this report because we recognize that bringing
NFV and SDN into carrier networks while vital is a major undertaking. Therefore, before
investment priorities are set, a rational big picture economic and strategic assessment is required
to determine the most appropriate long-term goals. Both organizations have a long heritage in
serving clients through application of technology and analysis, and together we bring a unique
perspective on the future of carrier networks.
We hope it will be an eye-opening read.
Sincerely
Ignacio GarciaAlves Marcus Weldon
Global Chairman and CEO
President of Bell Labs and CTO
Arthur D. Little

Alcatel Lucent

4

Abstract
A geographically diverse set of Tier 1 carriers is driving initiatives to standardize critical components
of network functions virtualization (NFV) and software-defined networks (SDN). Led by AT&T,
Deutsche Telekom, NTT, Telefonica and Verizon, among others, these carriers hope to bring new
technologies first developed and proven in the data center into their networks. The excitement over
NFV and SDN has created renewed interest in the networking business and has fanned debate
regarding potential winners and losers. So far, however, there has been only limited analysis of the
potential economic and competitive impact of these technologies on the network, operations and
the bottom-line.
This joint white paper by Arthur D. Little and Bell Labs aims to fill that gap. It offers our views on the
network of the future and discusses the value of fusing carrier networks with the cloud ecosystem,
as enabled by these technologies. These changes are both an opportunity and a necessity for
telecom operators and for those that get it right, it will be a game changer.

5

1. The challenge and the vision

Roughly two decades after the popularization of IP networking
and the Internet, much of the telecom industry especially
in hyper-competitive markets like Europe finds itself in a
tightening corner. The industry that enabled the web revolution
is now at risk of being marginalized to the role of mere access
provider, as nimble OTT, web-scale companies and cloud service
providers innovate more quickly.
This scenario has intensified the need for network transformation. And as a result, NFV and SDN concepts have moved
beyond research, becoming core enabling technologies for
meeting future demands and ensuring the relevance of service
providers in a cloud-centric world. To drive these advances,
leading carriers have aligned behind ETSI and ONF initiatives
(see Figure 1) and related standards work in IETF, OIF, BBF and
other standards bodies. Collectively, they are working to achieve
what no carrier could realistically accomplish alone, namely to
rewrite the blueprint for the automated, all-IP network
of the future.

In this future, existing IP networks will be transformed into

elastic, programmable, and dynamically manageable nextgeneration cloud/IP platforms, which operate at Internet
timescales and transaction volumes. To achieve this vision, the
industry is drawing inspiration from technologies already widely
used in the public cloud and IT environments to implement
services and manage connectivity. The largest carriers, like NTT,
DT and AT&T, are playing their part by trialing and showcasing
their network of the future concepts (see Figure 2). This new
approach has renewed interest (and ramped up innovation) in
the networking equipment business from software providers,
venture capital investors and traditional equipment vendors
all working to find new ways to transform and simplify the
network.
Now its vital for the telecommunications industry to advance
networking to a whole new level of programmability, to
facilitate the continued development of the web in the cloud
era and to ensure the industrys relevance in the cloud
ecosystem.

Figure 1: Carrier participation in industry standard bodies

Pre
2007

Apr
2008

Oct
2009

Concept of SDN
emerges from
research on
active and
programmable
networks

First open
source code of
OpenFlow
protocol for
Campus
networking
announced

First open
source code
for vSwitch
announced

2006

2007

2008

2009

Nov
2013

networks by
VMWare

Jan
2012
DTAG Basic
European
Network

2010

2011

AT&T Domain 2.0

Apr
2012

Feb
2014

First release
OpenDaylight
code
Hydrogen

Google
publicises
use of
OpenFlow

2012

2013

June Formal
Discussions
2012 on NFV

Significant venture
capital funding begins
for companies SDN
and network
virtualization (e.g.,
Nicira Networks)

ONF founded by DTAG,

Facebook, Google, Microsoft,
Verizon, and Yahoo! to
improve networking through
SDN and standardizing the
OpenFlow protocol

ETSI NFV white

paper backed by
13 operators

July
2007

Mar
2011

Oct
2012

Source: ETSI, ONF, OpenDaylight and press articles

Jul Acquisition
2012 of Nicira

April
2013

2014

The Linux
Foundation
found the
project
OpenDaylight,
an open source
framework to
accelerate SDN
NFV adoption

ETSI-ONF
collaboration
formalized on
SDN support
of NFV

Mar
2014

For society at large, the value of network transformation that

enables next-generation cloud/IP platforms is significant. The
benefits include more flexible services, faster time to market,
and improved user experience. But for the telecommunications
industry, this next-generation networking will significantly
change the status quo. Thats because being able to expose
and manipulate network resources on demand and at a
granular level will spur service innovation and allow richer
collaborations between customers and providers to emerge.
At the same time, it will enable a new class of competitors to
materialize, creating uncertainty about who will really gain from
these new services.
What is clear, however, is that virtualization, programmability
and network automation, enabled by these new technologies,
will drive down industry operating costs considerably. Bringing
NFV and SDN into public telecommunications networks across
the EU telecom industry could produce the following results,
according to our estimates:

A
s much as 14 billion euros in direct network operating
expense (OPEX) savings
A
further 25 billion euros of non-network savings from much
needed changes in the operating model of the industry
leading to a total savings of 39 billion euros, or 26 percent of
overall OPEX
Capturing the potential of network transformation requires not
only technical skill, but leadership in making significant changes
to current business and operating practices. The ICT industry
as a whole telecom, IT and device manufacturers as well
as governments have all played important roles in creating the
conditions for the Internet, cloud and mobile device revolution.
Now its vital for the telecommunications industry to advance
networking to a whole new level of programmability to facilitate
the continued development of the web in the cloud era and
to ensure the industrys relevance in the cloud ecosystem.

Figure 2: Key carrier NFV and SDN future concepts

Basic European
Network

Domain 2.0

NTT working to enable the next

generation network based cloud

Basic European Network (BEN) seeks

network modularization

NTT is a founding member of ONF

driving development of SDN and
COTS based Carrier Grade
virtualization

Network provides commodity and

generic enabling services

Rich APIs that manage, manipulate,

and consume services on-demand
and real-time

BEN is a simplified network with

intentionally limited functionality,
and based on COTS equipment

Seeks common infrastructure

purchased and provisioned like
datacenter pods

BEN is pre-integrated network for

roll-out as-is .. through a set of
defined nodes and interfaces

Builds on cloud technologies,

including servers, virtualization, SDN
switches and controllers,
competitive independent software
and well supported open source
communities

NTT global datacenters footprint and

Asia centric network makes it a
formidable competitor
Acquisition of numerous cloud and
communications vendors including
Virtela is a significant commitment
to the strategy

Local extensions should be

decoupled from BEN

Domain 2.0 is transformative

The market is moving rapidly towards the adoption cycle along two dimensions; the customer pitch and purchasing
Source: Public domain documentation

2. Rewriting the industrys future

Over the last decade, the Internet has transformed the telecom
industry. In the next ten years, it will probably continue to be
the single most powerful influence, as more devices become
connected and new forms of communication continue to
change how people interact with one another. Changes have
occurred across the globe, leaving no geography untouched by
fixed and mobile connectivity.
Wide coverage of fixed broadband connections is being
driven by the continued build-out and adoption of xDSL,
cable and fiber-based broadband services, particularly in
more developed markets.
E
xplosive growth of data-enabled mobile devices is
dramatically increasing the number of always-on network
endpoints.
A
cross both fixed and mobile networks, workloads are
changing from communications to cloud-centric new media
and data center interconnectivity.
M
achine-to-machine (M2M) growth will only strain networks
further.
Looking ahead, there is every reason to believe that the pace
of change will continue and, indeed, accelerate.
Cumulatively, these changes are having a profound technical and
economic impact on telecom networks by redefining many of
the parameters that governed network design. Therefore, a shift
in mindset is required from the relatively independent dynamic
compute-static network models of the pre-cloud networking
era to address the following new conditions:
Todays shift to large numbers of devices, which are
capable of consuming and sourcing very large amounts
of media-centric, geographically-shifting, and time-sensitive

workloads on demand This shift will require more efficient

and dynamically adaptable networks.
T
he move to cloud services This change requires
vertical scaling (adding more resources) and horizontal
scaling (adding new locations) of network functions and their
interconnection very rapidly (within seconds to minutes,
rather than days to weeks).
E
ver-increasing media quality expectations and
consumption patterns These changes necessitate new
content distribution architectures and more flexible flow
controls at the edge to improve performance, offer flexible
value-added network services and control network costs.
I ncreased use on a mass scale of signaling-heavy
applications, such as M2M or the Internet of Things (IoT)
Efficient scaling for these applications will require new
network architectures that can seamlessly trade off data
plane and signaling plane workloads.
In this new environment, significant change is needed to the
nature of the services offered and the network implementing
them. These changes must allow the network to participate
and contribute to the development of the cloud ecosystem.
For this approach to be a success, of course, requires a
compelling proposition for both customers and shareholders,
so the industry can invest in and capture the returns from
transformation. On the other hand, choosing not to invest in
such changes would severely limit the industrys role in the
rapidly growing cloud value chain.
The foundation of this crucial change is next-generation cloud/
IP transformation, enabled by NFV and SDN. In our view, it is a
clear imperative for the industry.

3. Addressing critical challenges

with NFV and SDN
Although it is still early days for the deployment of NFV and
SDN, these new technologies are already widely viewed as
essential components in the future of networking. Indeed, these
concepts have reached an inflection point in their development,
industry acceptance, and standardization drive, and are being
championed as the core enabling technologies to re-architect
carrier networks.

What are NFV and SDN?

At its most basic, NFV leverages virtualization technology
from the data-center environment to implement network
functions as software components. Heres how that works:
Previously, network functions typically ran in dedicated (and
often specialized) hardware. Now virtualization renders physical
functions as software that can be run as virtual machines
(VMs) over general-purpose processors (servers). In turn, all
hardware resources are managed as a common resource pool.
These VM resources can then be assigned (and repeatedly
reassigned) to different functions, on demand. This technique
maximizes the use and reuse of hardware resources and
dramatically streamlines hardware-related operating expenses.
In data centers, the benefits of this technique have reduced
the number of servers by up to 70 percent. Comparable
savings cant be achieved for all functions in the carrier network
environment due to massive real-time traffic volumes and
the processing-intensive nature of many network functions.
However, savings are expected to reach the 30 percent to 50
percent range.
SDN addresses a highly complementary need. The
instantiation of a service requires the dynamic interconnection
of network functions (whether physical or virtual) and the
associated service end-points.
These interconnections also need to be created, modified and
removed dynamically. In essence, the cloud must be able to
consume data center, metro and core networking resources
in the same way with the same speed that it consumes
compute and storage resources.

To address flexibility and timescale competitiveness in multiple

dimensions, NFV and SDN allow the network to integrate into
the cloud ecosystem using the same advanced cloud-based
approaches employed by OTT and web-scale companies and
cloud service providers. They also facilitate more efficient
network scaling to help address the challenges of massive
traffic growth. The first crucial step in this change is enabling
the network both functions and connections to become
programmable and automated3. In many ways, they are two
IP networks are very bandwidth efficient when providing
these interconnections and VPNs. However, provisioning
network connectivity typically uses management systems and
workflows that require varying degrees of manual planning and
configuration and, as a result take too long to execute. Thus,
satisfying vast numbers of dynamically changing demands
requires the abstraction and automation of the provisioning,
sourcing and life-cycle management processes for network
connections, particularly at the edges of the network, where
users attach to the network, and at the carrier data centers
where virtualized network resources are consumed.
SDN solves these issues with automated, policy-driven
control, distributed across network elements and federated
across network regions. This approach enables programmatic
control of network resources, using application programming
interfaces (APIs) for exposure to applications that want to
consume network resources, as well as to network controlling
applications that can be used to flexibly monitor, manage and
optimize the network.
In the web-scaled data center environment, the operational
benefits of this technique have been dramatic, achieving
over a 10:1 improvement in some instances. In the carrier
network environment, comparable savings cannot be achieved
due to the capillarity of most carrier networks. However,
operational savings are expected to reach the 25 percent to 40
percent range as a result of simplified connection fulfillment
and assurance processes. Google and Deutsche Telekom are
deploying SDN already in high-volume production networks.
NFV and SDN can be employed individually, but to get the
overarching benefit of elastically programmable networks, they
must be used together.

3 Programmable in the sense that the network can be customized and controlled through flexible APIs; automated in the sense that the network can fulfill these requests
without manual operations.

sides of the same transformational coin.

Programmability enables the creation of a new, dynamic
services portfolio that can make network resources available
and consumable at Internet speeds and scale. Automation is
the underlying zero-touch production environment required to
fulfill high volumes of service requests and drive operational
efficiency gains. The following sections describe these
capabilities in more detail.

The programmable network

NFV and SDN enable a change away from the static serviceprovisioning model for connectivity services.4 While new
business models and norms may take some time to mature,
these technologies enable a rich set of functionalities to be
flexibly instantiated within the network. Then they can be offered
to feature consumers (residential and business customers)
and network consumers (such as enterprises, verticals and
mobile virtual network operators [MVNOs]) using service portals
and APIs. These capabilities are similar to what cloud service
providers have been able to do with their services.
These services allow on-demand consumption of connectivity,
as well as exposing many new types of computing and network
functionalities to the outside world. So service providers can
dramatically expand the degree of control over the network that
can be offered to the customer, while simultaneously providing
a wider range of services. The expanded control capabilities
include attributes of the service, such as dynamically negotiable
resource availability, service quality, time-of-day variation and
allocation, localization, resiliency and diversity and more. They
also include federation across multiple operator networks.5
This control can be combined with flexible, network-embedded
virtual-service components, such as application-aware Quality
of Service (QoS), encryption, intrusion detection and WAN
acceleration, and offered as part of a customizable service menu
(service chain) creating a whole new network experience
for carrier customers. These changes put the network at the
heart of the move to cloud and facilitate the move of onpremises enterprise services into a cloud-delivery framework
whether for traditional carrier offerings such as unified

communications, collaboration tools and location or for new,

emerging or yet-to-be-conceived cloud-like services.
As well as allowing third-party applications to access and
manage network resources, the carrier will also be able to use
programmatic interfaces internally to efficiently employ mix-andmatch, best-in-class network monitoring, analytics, optimization
and control functions, so they can leverage network intelligence
more effectively to streamline processes and optimize
operations. As a result, carriers can better match the agility of
OTT and web-scale companies and offer customers service
provider functionalities and more with cloud-like flexibility.
These advances open the door to customers and operators
alike to invent new business models, to launch new products
and to scale them rapidly. But dynamic transformation of
carriers network and services operations will be required to
capture the full potential of NFV and SDN. Then carriers can
dramatically reduce time to service (as well as time to market)
and significantly streamline production costs objectives that
can only be achieved through automation.

Network automation
The other side of the NFV and SDN coin is network automation.
Realizing systemic automation requires systemic process
simplification and redefinition of the service delivery model.
These advances enable dynamic pricing, policy-based ondemand resource access, service instantiation, assurance,
analytics, and charging at cloud speed.
In this new model, the existing network is fully transitioned to
a streamlined, all-IP/Ethernet/optical network architecture from
the access to the core. Moreover, wherever its practical and
cost effective, service-delivery platforms and network functions
will be decoupled from special-purpose hardware platforms and
implemented as virtualized software, deployed on commercial,
general-purpose computing hardware, in much the same way as
typical cloud services. These profound changes will also facilitate
the drive toward highly converged platforms and integrated
control and operations functions across fixed and mobile
operations.6 Supporting this new architecture will require a new
approach to OSS and BSS.7

4 Connectivity services are typically private network and virtual private network services of various types for enterprise and data center interconnection, as well as
enterprise and consumer Internet access and communications services across fixed and mobile networks.
5 Refers to being able to expand programmable services across partner operators, with the ability to offer the same service capabilities independently of whichever
partner owns the serving network.
6 For example, converged IP edge functions (such as IP edge routers, security, CDN, video optimizations and value-added services) consolidated at edge cloud nodes,
and IP core functions (IMS/service platforms, policy, subs data, BSS/OSS, etc.) in more centralized data centers.
7 OSS refers to operations support systems, and BSS stands for business support systems computer systems used by service providers to manage their networks.
They support management functions such as network inventory, service provisioning, network configuration and fault management, among others.

10

Legacy workflow-based, semi-manual processes must be

replaced with dynamic control, management and orchestration
software working together to achieve real-time resource, service
and fulfillment domain management. This software-defined,
modular network architecture also enables a Lego-like rapid
development, launch and market test cycle (fail-fast) approach to
service innovation, from ideation to delivery on the order to cash
processes.

These barriers made it impractical for carriers to pursue this level

of network automation transformation. But now, the standards
effort being driven by the industry and expanding across many
standards bodies is changing that equation. The standards
and frameworks required for automation at scale that is,
virtualized function life-cycle management, flow-level data-plane
control, network resource modeling, service abstraction, and
much more are progressing with urgency and broad support.

This vision of the re-architected carrier network is not entirely

new. Many benefits of the advanced IT technologies it uses
have already been widely proven in data centers by cloud
service providers and leading-edge enterprises. Carriers have
lagged in broadly applying these technologies in such an
automated manner because of the complexity, heterogeneity
and stringent availability requirements of their network
infrastructure. In addition, theyve lacked an open framework
with standardized interfaces and APIs to automate and
orchestrate the consumption of network resources.

But to achieve this vision of programmability and automation,

carriers need to make difficult choices regarding the continuity
of legacy services and the restructuring of network sprawl and
operations. Only then can they fully capture the transformation
payback of streamlined next-generation network architectures,
simplified operations and, ultimately, reduced network OPEX.

The following section examines the potential for new sources of

value and value capture, as well as value destruction, associated
with adopting these technologies.

11

4. Cloud networking: a doubleedged sword

As carriers begin to transform (or cloudify) their networks
and operations, they will also overhaul existing services
and construct entirely new services to monetize network
investments. The former will enable new velocity and new types
of experiences for existing and new customers. The latter will
enable carriers to create network-differentiated propositions
for the provisioning of cloud networking, larger network-as-aservice offerings and cloud infrastructure services.
These advances are possible because cloud architectures let
carriers combine automated provisioning and service chaining,
deployed at scale, to develop and launch complex service
offerings through virtualized prototyping. They can also offer
them efficiently using personalized, self-service portals (see
Figure 3).
The following sections describe dynamic services enablement
and new services creation, which are expected to enable new
revenue streams and, ultimately, result in significant networkbased differentiation. In addition, they will also change the basis
of competition. New revenue opportunities are not limited to

enterprise services, but thats where we expect NFV and SDN

to have the most profound and immediate impact.

Dynamic service enablement

Dynamic services enablement and new services creation are
expected to enable new revenue streams and, ultimately,
result in significant network-based differentiation. In addition,
they will also change the basis of competition.
To overhaul the customer experience, its important that
customers can autonomously manage network functions,
based on specific contexts, workload types and traffic patterns.
NFV and SDN include programmability that allows services
to be requested and self-provisioned, reconfigured and deprovisioned. Real-time APIs make this possible, allowing
applications and users to request network resources when
needed, based on predefined service policies. There are
numerous examples of this capability. Elastic scaling is the
most quoted example. It allows network capacity to be varied
in line with service demand at short notice, and services can be
created and rapidly scaled up and down.

Figure 3: Future architecture of the carrier network enabled by SDN and NFV
vApp

vApp

vApp

vNF

Enterprise/ vApp
Private Cloud

vApp

vApp
Public
Cloud/CDNs

vNF

Service core VNFs

centralized in larger
network data centers

Streamlined
IP/Optical network
Optimized wireline/
Wireless access

vApp

vApp

vUC
vM2M

vHSS
vDNS

NaaS

vAAA

PaaS

vIMS

IaaS

vPCC

12

vUCaaS

vNF

vSecurity

SDN control
NFV management and orchestration
Converged applications

(Service platforms, OSS/BSS)

Telco
Central Cloud
Services/vNFs

Dynamic
software-defined
VPNs
Network Core
All-IP/Optical

vApp

vApp

vEPC
vBBU

vCDN
vIDS/IPS

vDPI

NaaS

vBNG
Telco
Distributed vCPE
Services/vNFs

PaaS

Network Access/Edge
All IP/Ethernet/
Optical
E2E QoS

Source: Arthur D. Little; Bell Labs

vNF

Network APIs

Edge & performance

critical VNFs distributed
to network edge cloud

IaaS

NFaaS
Vendors

Virtual Functionality
Applications
Extended Network
Services

End user
equipment

Network Core
Network Edge
Functions

With these enhanced networks, along with increased selfprovisioning, enterprises gain greater control over the real-time
bandwidth use of their applications. They can also use this
flexibility to offer a better user experience to both internal and
external customers by tailoring the quality of service to the
needs of individual applications and by dynamically scaling
service capacity when needed. In each case, elasticity and
bandwidth control will create monetization opportunities.
Software-defined VPNs (SD-VPNs) the virtualized alternative
(or complement) to traditional VPNs for enterprises
incorporate many network virtualization and programmability
capabilities. They enable rapid site turn-up and secure
connectivity over any IP access, along with agile, policy-driven
automated provisioning, efficient security management, and
enterprise self-administration. They also include programmability
that enhances an operators ability to offer service trials. Such
try-before-you-buy offers promote greater market acceptance
through broader service awareness, and they can accelerate
revenue capture through faster service adoption.
User control of available network capacity, through elastic
scaling and bandwidth management, is the essence of policyand application-driven networking which is used to create
and redefine customized, context-dependent services in real
time. The utility of this elastic capability can be bolstered through
network analytics that dynamically monitor network state
and quickly adapt service delivery accordingly. These dynamic
services can be monetized using innovative pricing models
that reflect the enhanced user experience and are optimized
with respect to current network utilization levels and demand
elasticity.
For a typical Tier 1 operator, we estimate that these dynamic
services, together with the pull-through services described in
the following section, could generate an increase of 10 percent
to 15 percent in existing enterprise customer data revenues.
A significant new market segment for dynamically enabled
services can be found among web-scale players and large
global enterprises. Thats because SDN-enabled networking
provides the capability to rapidly deploy new multi-national sites
(even temporary sites), adapting their inter-connectivity and
management to dynamically changing workloads through policybased control.

New and expanded services

But NFV and SDN allow much more than connectivity. New
network offerings can be augmented through dynamically
flexible service chains, significantly increasing the value of

basic network connectivity. Moreover, these technologies

enable virtual network slices to be made available to third
parties that considerably expand the monetization potential of
networks.
QoS along with security is at the heart of why enterprise VPNs
remain important. NFV and SDN allow carriers to offer elastic
bandwidth, selectable QoSlevels and a la carte security options.
As an example, on-demand virtualized security appliances
can be embedded into customer networks as service-chained
functions. These security services can provide basic secure
connectivity elements, such as firewall, network address and
port translation (NAPT) and access control lists (ACLs), as well as
value-added services such as sophisticated intrusion prevention
and detention, denial of service prevention, and on-demand
security probes. Reimagining security as an integral part of
the network can go much further and extend into applicationspecific, policy-driven, end-to-end managed security services,
enabled by innovative security extensions to network APIs.
These technologies also enable novel uses of existing telecom
networks that would appeal to many web-scale, IT and
enterprise customers. Specifically, SDN enables network
slicing or providing an owned-like network experience to third
parties. Allowing customers to use the network in this way is
an emerging opportunity, but several use cases are becoming
apparent.
The most obvious use is offering targeted business-to-businessto-consumer (B2B2C) services with customized QoS and
functional requirements. These capabilities could attract M2M
application providers and specific industry verticals, such
as financial services, healthcare and manufacturing. Other
emerging use cases include leasing part of the virtualized mobile
core to MVNO operators that need subscriber policy control but
do not wish to invest in a full-scale, end-to-end core network.
But reimagined versions of traditional telco services are not the
only opportunities these technologies enable. Forward-looking
carriers can use these technologies to leverage and extend
the network into cloud infrastructure services. For example,
network-attached infrastructure as a service (IaaS), platform
as a service (PaaS), and hosted software as a service (SaaS)
could include enhanced localized and network-aware compute,
storage and desktop-as-a-service applications, a growth
area where operators can leverage their footprint and their
connectivity into the enterprise LAN.
Examples of new revenue sources are listed in Table 1, for both
new services and dynamic services enablement.

13

Table 1: Potential new revenue sources

Dynamic service
enablement
Bandwidth on demand
and bandwidth
calendaring
E
nhanced user control of
virtual network slices
A
utomated burst-able
elastic bandwidth

New and expanded services

R
eal-time, end-user
customizable service
options
S
ecurity services, such
as firewalls, IPS and
IDS, content filtering and
endpoint security

I aaS: Compute, storage

R
eal-time, contextand desktop as a service
dependent optimization of
Granular network slices:
service quality
Network functions as a
Rapid turn-up and
service (virtual IMS and
configuration of new
virtual EPC,)
enterprise sites
Enterprise connectivity:
Enablement of rapid,
SD-VPN and virtual CPE
customized product trials
services
Federated multi-operator
dynamic virtual networks
New revenue streams are expected from both dynamic service
enablement and new services. Quantifying the former is
challenging. However, dynamic service enablement is likely to
shake up the structure of the 22 billion euro European enterprise
networking industry, as dynamical networking inevitably
displaces regular static networking. The most dramatic growth
opportunities will open up as operators can claim a stake in the
fast-growing 18 billion euro IT security business, 17 billion euro
cloud services market and the emerging non-access-based
wholesale businesses. The absolute level of growth for the 113
billion euro business telecom market will depend on multiple
factors, including the competitive reality in each geography and
execution. But it should allow the industry to stake a credible
claim for the provision of differentiated network services and
network-differentiated cloud services.
Successful first movers stand to capture a disproportionate
share of this disrupted revenue. However, the basis of
competition will also be changed irreversibly, through migration
away from traditionally monolithic, purpose-built architectures for
telecom communications services and largely static network
connectivity services toward highly virtualized and automated
systems architectures, similar to those used in modern IT stacks
and cloud delivery models. Four dimensions of this change are
considered in the following sections.

14

New relationships with customers

On-demand and policy-based use of network resources will
shift the balance of the carrier-enterprise customer relationship,
which is currently structured as rigid, exclusive contracts lasting
one to three years. In this new on-demand environment,
customers will want to supplement longer-term commitments
with supplemental shorter-term contracts to provide elastic
connectivity services. Such providers may offer on-demand
services on very different pricing models, using daily or hourly
timescales or perhaps even real-time usage information to price
their services.
The most sophisticated customers may even buy into formal
capacity reservation-and-release management (bandwidth
calendaring) business arrangements. To deal with the new
service-offering complexity, customers may engage network
operators or intermediaries (service brokers) to dynamically
manage elastic network resources, so that workloads and
purchased capacity are perfectly matched. This may lead to
new revenue opportunities for carriers, or it may encourage
customers to do away with a primary network supplier
altogether and buy all services on demand from the open
marketplace. While this latter option seems extreme for an
enterprise client, it is hardly unfamiliar to carriers, because this is
how the market for wholesale services currently operates.
While full-fledged adoption of wholesale-like communication
services will not be for the faint hearted, enterprises that
make that choice will act, in many ways, like another carrier.
The potential impact is important, because carriers may see
relationships with many of their largest customers progressively
shift to a wholesale approach. In some cases, the customers
may even transform into competitors one day.

New classes of competitors

Virtualization, network service abstraction and programmability
will radically change how carriers and their customers see
networks. The implications are significant, because, effectively,
anyone can become a service provider, since, in effect, network
ownership is no longer a prerequisite for service delivery.
No doubt, these services will be used by OTT and webscale companies and cloud service providers to evolve their
service offerings. But, more importantly, the emerging market
for dynamic services (bandwidth and functions) provides a
disruptive opening for smaller, more-focused network operators,
such as carriers carrier providers, to compete more aggressively
in the growth markets for large enterprise WAN and data center
interconnect (DCI).

At the other end of the scale, many existing enterprise

customers like banks, retailers or media companies could
become powerful alternative service providers, encroaching in
the mass telecommunications market. This new class of massmarket competitor could develop business models based on
access to network functionalities that allow them to:
Build higher-value, embedded cloud-like service
C
reate and deliver their own version of traditional network
services, such as WhatsApp or Line, thereby competing
with SMS
Develop the next big thing in ICT services
The implications of the carrier network converting into a cloud
delivery platform are significant. These shifts build carrier value
for XaaS services, but they could also result in a significant
outflow of value across both consumer and business market
segments, in favor of new competitors. Powerful new players
could seek (and have the muscle) to drive a wedge between
carriers and their customers in the long term, forcing the carrier
into a wholesale relationship.

New collaborations
A rich new set of business models, based on flexible forms of
network disaggregation, will be enabled, through the mix of
on-demand access to connectivity, along with exposing core
network functionalities to other entities. This change is a far cry
from open-access provisions mandated by market liberalization
regulations. Rather, it is a market-driven approach that will
enable a much bigger network services ecosystem. Carriers
and third parties will work together actively to devise and enrich
service offerings, leveraging network-function-as-a-service
(NFaaS) capabilities from carriers, as well as federated access
and network services accessed with open network APIs.
The implications are both promising and challenging for carriers.
Carriers will be able to buy into each others dynamic VPNs
and NFaaS offerings to expand their services beyond their
traditional geographic footprints. The ability to link these virtual
network capabilities on demand will spur a wave of new product
introductions to take advantage of new operating synergies and
new business opportunities among carriers, network-equipment
vendors and cloud-service providers. This activity will be much
like current trends among OTT and web-scale companies and
their partner ecosystems. When done right, these collaborations
can create promising new value for customers and partners.
But in the process, they may accelerate erosion of traditional

communication services and tiering of the industry, as a result

of market share shift towards service innovators.

Profound changes to operations

Automated networks will lead to a significant change in the
traditional carrier operating model. Service fulfillment and
assurance will be simplified, and customization will be easier
through global network resource management, abstraction and
granular manipulation using APIs. The methods are much like
those used with cloud compute resources.
The combination of all-IP, NFV and SDN will allow telcos to
transition into a cloud-like operating model. Their customers
will be able to dynamically and automatically define, provision
and operate the VPNs that support their services, applications
and users. The carriers will offer just-in-time access to network
connectivity and NFaaS almost instantly, at a better cost than
comparable self-managed solutions. They can also enable
dynamic control of network resource consumption by individual
data flows, according to QoE and customer-defined service
policies.
However, taking full advantage of the technologies requires
massive process automation and redefinition of the service
delivery model. As described earlier, current BSS and OSS do
not support the functionalities required for real-time network
operations, administration and management. Consequently,
these systems should be replaced over time, so they can
support the new service portfolio and transition to the cloud-like
operating model thats needed to capture major revenue and
efficiency gains.
On the flip-side, retiring these systems also means retiring
many legacy services and their associated revenues. While this
is a simplistic summation of the challenge, it does illustrate the
dilemmas that carriers face when making technological and
organizational changes to implement automation.
Just as technology disruption has created winners and losers in
other industries, these technologies will trigger similar patterns
in telecommunications. But in this case, it is not outsiders that
are leading the disruptive process. Instead, the largest service
providers in the industry are jockeying for a role in the cloud/ICT
space.
The following section examines the economic impact of these
technologies on current operations.

15

5. Creating value across the business

With billions of dollars worth of assets in equipment,
services and human assets, moving to a new automated and
programmable architecture in carrier networks is not without
risk. So it is vitally important to understand the magnitude of the
benefit that is possible. Thats why we have analyzed the impact,
especially the OPEX benefits, of transforming carrier networks
in line with NFV and SDN principles.
The study examined operators in 35 European countries.
Collectively, these operators had adjusted revenues of 250
billion euros in 2013, with annual OPEX of 150 billion euros and a
staff of 665,000.8,9 The analysis used telecom expenditure data
from financial reports, validated through individual case studies
on network evolution strategy. The impact was examined along
two dimensions, technology onboarding and changes to the
operating model.

Figure 4: European carrier aggregate savings

Sources of OpEx savings

Euro billions
-39 bn
150

23
6
17

59

11
8

5
5

111
44

91
67

Our calculations show that the efficiency impact of onboarding

NFV and SDN for these operators could be worth 14 billion
euros per year, equal to 10 percent of total OPEX. The results
are driven by savings from automation and simplification. These
findings are only part of the story, however. A further savings of
25 billion euros per year equal to 16 percent of total OPEX
can be generated by changing and simplifying the operating
model (see Figure 4).
The following sections take a closer look at each dimension of
the analysis.

Technology onboarding
Technology onboarding, as defined here, refers to broadly
employing automated NFV and SDN capabilities to transform
the carrier network. This process is achieved by adopting
software-based network functions, wherever practical and
cost effective. These functions are deployed on commercial
off-the-shelf hardware, linked by dynamically configured

Combined
OpEX 20131

Outsourcing/ Labour costs NW Power &

Other OpEX
Real Estate

NW OPEX

Combined
impact

Sales and Support Operations OPEX

1) Adjusted OPEX excludes ICX and handset related expenses which

represent 8.3% of the revenues of all fixed and mobile operators in 35
European countries
Source: BellLabs and Arthur D. Little calculations

interconnections and united through software control. Optimal

coexistence of physical and software-based network functions
is made possible through a virtualization and cloud-network
orchestration layer, which uses network abstraction to automate
and globalize management of physical and virtual network
resources.
The calculations in our analysis show potential savings worth 14
billion euros, across all network production platforms from
access at the edge of the network all the way to the service
delivery and monitoring platforms deep in the core. However,
the absolute impact is largest in the access and aggregation,

8 Across the 35 European countries (including Turkey) covered in this study, revenue from services reached 275 billion euros (adjusted 250 billion excluding ICX and
handset sales) in 2013. Operating costs represented 60 percent of overall adjusted revenues, equal to 170 billion euros (adjusted 150 billion excluding ICX and handset
sales). Across Europe, the industry employed a staff of 665,000, excluding external contractors.
9 Management of the network infrastructure, including all network-related operations and IT, is the single largest OPEX category and is very labor intensive. In 2013, the
cost base was 50 billion euros or 33 percent of adjusted costs and employed a staff of 180,000, equal to 27 percent of headcount. These costs increase further by 8
billion, or 6 percent of adjusted costs and 84,000 staff (13 percent), if the costs of installing fixed-line customer premises equipment is also considered in the scope of
the network. Fixed network operators outspend their mobile counterparts by approximately 37 billion euros. Moreover, they employ six times as many staff. Of a total
of 460,000 employees, network staff is over 50 percent, with approximately 230,000 people. In contrast, all mobile operators employed 205,000 staff, of which only
35,000 performed network-related functions.

16

Figure 5: European carrier technology on-boarding savings

Figure 6: European carriers rewrite operating model savings

Rewrite operating model OpEx savings

Technology on-boarding OpEx savings

Euro billions

Euro billions

-25 bn

-14 bn
58,7

91

7,4

2,7

9
2
6

1,7
3,0

3,2
1,2
1,3

NW OpEX Access/
2013
Agregation

5
3

0,7

Service
platforms

Power & Real Estate

6
3
3

3
2

1,8

0,2
1,0 0,5

1,2
0,4
0,6 0,3

2
2 0

67

0,8
0,5 0,2 44,4
0,1

Core

TransNetwork Final Adj.

mission monitoring OpEx
& mgmt

Labour

Outourcing / Other OPEX

Source: Bell Labs and Arthur D. Little calculations

service delivery and core platforms across mobile and fixed

networks (see Figure 5).
Across all layers, major savings are realized in design,
integration, deployment and operations areas in which remote
management significantly reduces labor and third-party costs.
Additional savings are achieved from lower power costs for the
core and service platforms, driven by virtualization. They result
from substantial reductions in special-purpose hardware, cutting
electric power consumption by nearly one half.
Please note that the above calculations reflect only the direct
impact of NFV and SDN. Additional collateral savings are
expected as a consequence of technology onboarding, through
accelerated retirement of legacy network equipment to
promote an all IP/Ethernet transformation of the network. As a
consequence, all other non-IP legacy services are turned down,
including ATM, frame relay, ISDN and PSTN. In addition, legacy
network support functions are removed from the network and
the balance sheet. The outcome is a streamlined all-IP network.
That is, it uses an end-to-end IP-Ethernet-optical services and
transport architecture with an open IP/SDN-based control plane.
Mass simplification at this scale allows network footprints
and operations to be radically downsized, particularly for fixed
operators.

Sales & Customer

Sales &
Care
Support Marketing
Op.OpEx
2013
Labour

G&A

IT

Facilities

Final Adj.
OpEx

Outourcing / Other OPEX

Source: Bell Labs and Arthur D. Little calculations

Revised operating model

Over time, networks build up operational complexity. It typically
results from a high degree of vertical specialization, lack of
unifying services and resource abstraction, and a bloated
back-office support environment that includes layers of legacy
systems, applications and expensive IT workarounds. Rewriting
the operating model is about taking advantage of flexible new
technologies to streamline operations in the business layer from
marketing, sales, back-office and associated IT.
Our calculations show that, for each euro of network OPEX
savings, there is considerably more than a euro of value in
non-network OPEX savings (see Figure 6), which equates to
a further 25 billion euros in our model. These savings could
increase yet further, if the industry were to take concerted steps
towards online-only selling, service provisioning and self-care.
The aggregate impact of NFV and SDN is somewhat greater for
fixed operators than mobile operators. Expressed in economic
terms, we estimate that fixed operators will capture 20 billion
euros or 27 percent of fixed OPEX, whereas mobile operators
will capture the balance of 20 billion euros, representing 25
percent of mobile OPEX. Expressed in unit costs10, fixed line
OPEX in 2013 stood at 205 euros per year per line. By contrast,
mobile OPEX per SIM was lower at 98 euros per year, a
reflection of the relatively simpler service portfolio, lower ratio
of legacy networks and systems, and higher starting level of
automation. NFV and SDN technology on-boarding will, by itself,

10 Across the 35 European reference countries, 360 million fixed lines and 775 million mobile SIMs were in service in 2013.

17

Figure 7: Total SDN/NFV fixed and mobile operators OpEx savings

Impact on Fixed Operators

Impact on Mobile operators

Euro billions

Euro billions
-25%

-27%

76

74
8

Technology
on-boarding

Adj OPEX
2013

NW savings

66

Adj OPEX

70
13

12

54

Rewrite
operating
model

Final Adj
OPEX

Adj OPEX
2013

Sales and Support Operations OpEx

Technology
on-boarding
NW savings

Adj OPEX

Rewrite
operating
model

57

Final Adj
OPEX

Sales and Support Operations OpEx

Source: Bell Labs and Arthur D. Little calculations

enable savings of 23 euros per fixed line and only 8 euros per mobile SIM, whereas rewriting the operating model will generate a
further 32 euros per fixed line and 17 euros per mobile SIM (see Figures 7 and 8).
The following section discusses how the industry and individual operators should respond to the opportunity.

Figure 8: Unitary SDN/NFV fixed and mobile operators OpEx savings

Impact on Fixed Operators

Impact on Mobile operators

per line p.a.

per SIM p.a.

-27%

205
23

182
32

150

-25%
98

Adj OPEX
2013

Technology
on-boarding
NW savings

Adj OPEX

Rewrite
operating
model

Sales and Support Operations OpEx

Source: Bell Labs and Arthur D. Little calculations

18

Final Adj
OPEX

Adj OPEX
2013

Technology
on-boarding
NW savings

90

Adj OPEX

17

74

Rewrite
operating
model

Final Adj
OPEX

Sales and Support Operations OpEx

6. Choosing the right business model

for each carrier
The race for the cloud/IP networking space started before
the arrival of NFV and SDN, with cloud service offerings from
players like NTT, Verizon, AT&T, Orange and BT. Now, adoption
of these new technologies into the very fabric of the carrier
network will dramatically accelerate the pace and magnitude
of change. Deciding how to move forward will require choices
regarding the best business models for the future and the right
playbook to get there.
Carriers can no longer afford to ponder if and when to make
the transition. Instead, they need to start planning how and
where to implement these technologies and support them with
credible customer adoption and business economics. In our
view, theres no single roadmap for the industry. Rather, each
carrier must decide its own path, balancing the needs of the
marketplace with the reality of investment cycles and the needs
of the shareholders.
Upfront efforts at standardization and R&D investments for
proof-of-concepts are vital to get ahead on the learning curve.
But staying ahead to capitalize on this opportunity requires
individual carriers to think more broadly about the business and
operating model consequences of the transition. In this context
while service providers re-evaluate their business models,
product portfolios and supplier relationships its a good time
to question some industry taboos.
For example, the industry has traditionally associated being
an access-only provider as a fools prize.11 While theres more
than a grain of truth here, it reflects the vertical and monolithic
business designs of hard-wired access, transport and service
platforms. However, the relevance of these all too familiar
structures is being challenged. The challenge grows out of the
flexibility enabled by IP networking, first, and now by NFV and
SDN technologies, coupled with the ever-expanding use of cloud
technologies by carriers clients.
In this new environment of flatter, programmable and automated
networks on a global scale, the monolithic structure is outdated,
neither defensible nor suited for sustaining competitive
advantage. To compete, carriers must move toward more
flexible multi-level service delivery architectures. In addition,

they must even go so far as to cooperate with each other,

with OTT and web-scale companies, and with cloud service
providers to ensure cloud relevance and global scale. Moreover,
as the industry expands to offer new service functions from the
network, carriers must learn to work with new partners using
nontraditional models.
That means carriers must consider what will be the most
appropriate business model for success. The following sections
briefly outline two major alternative paths, the access-centric
carrier and the cloud carrier. Each carrier can then consider how
its capabilities and goals fit these descriptions.
A
ccess-centric carriers use automated networking to allow
flexible disaggregation of telco service, control and access
layers, which provides control to a slice of the access layers
through standardized APIs. Access carriers leave behind the
complexity of service-delivery platforms and operations, and
their associated revenue, for a lean business model thats
optimized for efficient operations. Access-centric carriers
become the de facto access providers to cloud carriers
and enterprises, as well as IT and OTT players. The carrier
may not completely abandon its non-access-related service
portfolio. Rather it manages the business challenge by
ensuring its service portfolio remains lean and contributes
measurable value.
C
loud carriers use the full suite of programmable,
automated, orchestrated NFV and SDN techniques to carve
out a sustainable value in the new cloud ecosystem. The
value comes from offering consumable on-demand network
services that are elastic, secure and seamless across
clouds and WAN. The carriers can do this because their
scale is great enough to allow investment in transformation,
leveraged across a large service footprint, and they have
the geographic reach to directly serve the large enterprises
and OTT and web-scale companies that will be the upfront
adopters. Cloud carriers will typically also be access carriers
in one or more domestic markets, and work with partner
access carriers in other markets. The connection between
these two models typically will be made by carriers using
the global cloud they create to serve the international needs

11 The telecom industry, threatened by OTT and web-based service providers, has argued that they must absorb the massive costs of developing and operating the global
networks, while OTT players benefit from these without apparent regard for the traffic they generate.

19

of the enterprises that are homed in their domestic markets,

i.e. by essentially following the enterprise into their global
markets.
Moreover, by managing end-to-end cloud networking and
compute resources, these carriers can implement the
strictest compliance standards for data localization, privacy
regulations and service performance. They can partner
with local access providers (including in-house access
businesses) to serve customers across the world, leveraging
their brand, distribution capabilities and service portfolio
to capture and retain customers. Cloud carriers12 will be
able to provision a homogenous global experience, directly
connecting through their own and partner access, which
gives them full control of the user experience, limited only
by the technical characteristics (coverage, bandwidth limits
and latency) of the access type. This platform architecture
will also enable cloud carriers to partner efficiently with many
third-party software vendors across a range of applications,
from security, mobility and unified communications, to
deliver these solutions on demand.
While both models offer value-creation alternatives for existing
carriers and their shareholders, their key success factors are
very different. An operator aiming at an access-centric carrier
model should concentrate its technology investments to
enable dynamically consumable access, but otherwise focus

relentlessly on cost and efficiency.13 An operator aiming at a

cloud-carrier model should consider focusing on building a
portfolio and ecosystem of world-class innovative services,
combining in-house developed services with third-party offerings
to deliver unique value-added dynamic services.
The most appropriate path for any specific carrier will be
dictated by geographic scope and scale, as discussed above, as
well as by their current product portfolio, their local competitive
environment and their internal culture for business innovation. In
our view, the critical challenge for a carrier, and the industry as a
whole, is not simply to make the right choice for their particular
strategic condition but also to see it through in a focused,
purposeful and timely fashion.
Without strategic clarity and a realistic assessment of their
own capabilities, carriers run the risk of losing focus for their
transformation by trying to compete equally in both cloudand access-carriers models. This can lead to unsustainable
investments, or even worse, making uncorrelated investment
decisions that waste company cashflow and resources. Clearly
the larger opportunity lies with carriers that are in a position to
become cloud carriers. However, in both segments, the carriers
that lead in executing a clear strategy will grow market share at
the expense of the rest.
The following section discusses how individual operators should
start bringing NFV and SDN into their networks.

12 This characterization does not preclude that a telco may create an internally focused cloud carrier to centralize management of international network of OpCo.
13 Such an archetype could continue to provide non-access services through white-label cloud carriers or traditional partners XaaS offerings.

20

7. Driving the process of transformation

To gain the benefits of NFV and SDN, carriers need to begin
with actions in the following three high-priority areas.

Develop a new cloud-enabled product roadmap

The OTT and web-scale and enterprise cloud ecosystem is
advancing rapidly. To stake a claim to their share of the value,
carriers too must move quickly. Convincing enterprise customers
to migrate their applications to a carrier-based cloud may be
a challenging sell upfront. But a more accessible, immediate
opportunity is to make the case for dynamic networking in
support of their cloud strategies.
The first-mover advantage will allow carriers to capture share
in these enhanced VPN services from traditional (static)
networking competitors, and it will position them to up-sell
value-added NFV- and SDN-based services as part of automated
turnkey solutions.
The following five broad actions for carriers and their clients can
help drive the transformation:
W
ork directly with clients and through industry forums to cocreate high-value use cases for adoption of next-generation
enterprise network services and prioritize technical and
operating models development.
D
evelop thought leadership on key compliance issues linked
to use of distributed cloud computing, particularly data
placement and security in outsourced, out-of-country and
out-of-region data centers.
D
efine the technical requirements, standards, architectures
and certification processes that can meet operational
control, data security, localization and privacy needs across
different industries.
B
egin planning for the evolution of network service
catalogues and business models to ensure timely and
relevant investment in new platforms and systems, as well
as retirement of legacy network systems.
F
inally, start early to build up federated alliances similar to
those seen in the travel industry (SkyTeam, Oneworld and
Staralliance), as well as joint ventures and marketplaces
among carriers and with clients with the goal of serving
client automation needs globally. We recommend forming

an alliance of network operators that will allow the expedited

development of federated dynamic connectivity and
higher layer services, multi-operator service chaining, and
coordinated marketing of federated services across the
alliance members combined channels. This is essentially
a operator analog of the airline alliances such as the Star
Alliance and Sky Team, which allow flight code sharing,
federation of reservation systems and sharing of hubs
and other facilities. Forming such a global network alliance
(GNA) will enable operators to bring to market ubiquitous
global automated services and compete effectively with
web-scale providers.
Driving this agenda forward with large enterprises and OTT
and web-scale companies will allow carriers to use network
automation as a tool to bundle multiple services, which is
especially important while standards are still developing, and
there is no single standard for interworking service components
on a mix-and-match basis across service providers. Moreover,
by engaging with clients at an early stage, carriers can fine-tune
the roadmap for their future service catalogue and make sure
it is supported by credible marketplace investment cases for
transformation.

Build up programmability and systems engineering

capabilities
A new service catalogue of automated, programmable services
will not be built overnight. It must necessarily be phased and
will require a coordinated parallel evolution of the virtualization
infrastructure, automated networking control and operations
model. The roadmap for virtualization of network functions will
be influenced by feasibility, degree of benefit and investment
cycles. The roadmap for SDN automation is also likely to be
rolled out in phases involving intra-data center, intra-data center
overlay, and finally full WAN SDN control.
Given the need to build up this transformation step by step,
it is vital for carriers to begin early with some low hanging
fruittype applications, such as enterprise overlay (that is,
software-defined) VPNs or the service chaining of networkservice functions for consumers and enterprises. Carriers that
establish a leadership position in these early stages will have a

21

learning-curve advantage, along with a much better chance of

maintaining that competitive lead in later phases.
The standards that must be developed, the components
that must be interworked, and the operations that must be
integrated within the network will freely combine IT and carrier
networking. In practice, that means each carrier must build
services, while simultaneously filling in missing IT capabilities.
One core challenge is the operating model schism between
network operations (mobile, fixed access and core) and IT
operations (back-office systems, collaborations, communications
systems and so forth). Currently these teams operate in vertical
silos. But introducing NFV and SDN into the network blurs
these boundaries. As a result, the operations workflows and the
management systems at both the business and network layers
will need to be integrated in new, better-abstracted, and much
more automated ways.
To achieve a fully automated state, carriers must be able to
systematically bridge the gaps across these domains. That
means building up what well call cloud network systems
engineering expertise, a vital skill set that combines both IT
and networking disciplines to enable an effective and timely
transition.

Streamline network and accelerate legacy retirement

Investing time, effort and resources in operational service
automation and network programmability only makes sense for
mainstream IP-oriented services and networking technologies.
In fact, automation transformation provides a powerful

22

incentive to rigorously streamline the network, which simplifies

development and deployment of a new automated control,
management and operations environment.
Todays IP-based services are already operationally efficient
compared to legacy services such as PSTN, ATM, frame relay
and SONET/SDH. With automation, operational expenses
for the transformed services will be reduced to a whole new
level, per service and especially per service transaction. With
this widening gulf in operational efficiency, coupled with an
urgent need to reduce OPEX broadly to accelerate investment
in automation, the conclusion is plain: The best way to ensure
effective and timely transformation to a streamlined and
automated network is to aggressively accelerate the retirement
of legacy services and networks.
Traditionally, legacy services have had very long lives, because
carriers want to retain their durable, though diminishing, cash
flows for as long as possible, while also providing continuity of
services to long-time customers. But maintaining these services
comes at a hefty price namely the inefficiency of operating
parallel overlay networking and service infrastructures, which
includes the complexity and extended proliferation of OSS
and BSS systems and all the associated parallel staffing and
footprint costs. To prevent competitors from scooping up these
customers with their own differentiated offerings, carriers may
prefer to cannibalize their own legacy services by proactively
providing incentives to move to automated IP/Ethernet/optical
services (with higher capacity, at much better price per megabit
per second). In this bargain, the carriers end up with a more
agile, innovative and competitive business.

8. Conclusion
Network innovation based on NFV and SDN holds tremendous promise for the future of networks. But for this promise to be
realized, carriers must transform their heterogeneous networks into a streamlined, automated whole. To achieve this goal, they
need to seek inspiration from cloud peers, while maintaining the reliability and service quality customers expect. None of that is
simple. However, the prize for carriers that get it right is significant. It includes systemic streamlining of operations, exposure of
network services to high-volume, dynamic consumption by cloud applications and cloud-based enterprises and perhaps even the
opportunity for decommoditization of the network.
Carriers must plan and phase such an extensive network transformation carefully. The process includes iterating frequently and
working closely with both suppliers and lead customers to maximize the benefit and the learning at each phase. It also involves
building up increasingly value-rich solutions that advance toward the ultimate goal. Some key actions include:
A
dapting business models to actively shape marketplace adoption of cloud/IP networking services from enterprise customers as
well as wholesale segments (OTT and web-scale, carriers carriers, IT players, etc.)
E
ngaging openly with other carriers regarding standards alignment to facilitate cloud/IP networking enablement, including
tackling regulatory issues of cross-border data storage and privacy concerns
I nvolving suppliers in the early stages of planning network transformation, and monitoring the emerging cloud networking
ecosystem to identify disruptions in the supplier landscape as this space matures
Developing alliances and joint ventures (similar to airlines) to support the global dynamic cloud network needs of multi-national
corporations and OTT and web-scale companies, based on a shared vision of an automated network services catalogue
evolution
F
ormulating a strategy and a timeline for aggressively retiring legacy services that will facilitate a more rapid transformation to
the cloud/IP network
The opportunities and decisions that carriers now face, given the expected breadth of changes from SDN, NFV, and the cloudnetworking market, make this one of the most exciting, pivotal times in the history of communications networks. A lot is at stake.
And as in any major disruption, there will be winners and losers. We believe that the winners in this case will be the carriers that:
Move early and purposefully
Co-create the future with lead customers and partners
Take the opportunity to not only virtualize and automate their networks, but also thoroughly converge and streamline them
These will be the agile service providers equipped to thrive in the cloud ecosystem.

23

Authors

Authors:
Jess Portal

Salman Ali

Arthur D. Little
portal.jesus@adlittle.com

Arthur D. Little
ali.salman@adlittle.com

Enrique Moral

Kevin A. Sparks

Arthur D. Little
moral.enrique@adlittle.com

Bell Labs
kevin.sparks@alcatel-lucent.com

Enrique Hernandez-Valencia

Subramanian Prakash

Bell Labs Consulting

enrique.hernandez@bell-labs.com

Bell Labs Consulting

subramanian.prakash@bell-labs.com

Narayan Raman
Bell Labs
narayan.raman@bell-labs.com

Acknowledgement for their support and valuable input: Volker Pfirsching and Anders Johansson

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how they affect your business, please contact:

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